May Retail Sales Drop, but Underlying Numbers Are Promising

May retail sales figures seem to show U.S. consumers are losing their drive to shop, but some of the weakness in the numbers may be due to a quirk in the calendar, not in shoppers' attitudes.

A late Memorial Day that shifted holiday sales to June drained some of the momentum from the May figures. Many retailers had estimated the shift -- to a week later than last year -- would lop up to 3 percentage points off their sales growth rate for the month. But drilling down into the numbers, there are signs that U.S. consumers are still willing to pony up for certain worthy items, though they're holding the line on others.

The Commerce Department's retail and food services sales tally for May rose to $362.5 billion, up 6.9% from May 2009 but down 1.2% from this April. Analysts had expected growth of 0.2% month-over-month. Excluding auto sales, totals were up 6.1% from May 2009 and retail sales were up 7.4% year-over-year, but were down 1.1% and 1.4% from April. The Commerce Department's tally is the most complete picture of the retail industry: It includes gas, food and auto sales, as well as the results for Wal-Mart Stores (WMT), the world's largest retailer, which doesn't publicly report its monthly sales.

The month-over-month drops were largest among building supplies retailers (down 9.3% from April) and gas stations (down 3.3%). But some areas showed unexpected growth both from last month and May 2009: Sales at furniture and home furnishing stores were up 1% over April and 5.3% above last May, which suggests that consumers are becoming more willing to spend on nonessential items for the home. Sales at electronics stores -- which had been battered by falling prices on flat-screens and computers -- rose 0.6% over April and 5% above last May, even as many retailers continued to complain about price deflation.

Restocking and Rehiring Cycle Will Squeeze Profits

At the core, the strength in areas such as furniture and electronics shows retail is doing better than had been expected, said Brian Sozzi, retail analyst at Wall Street Strategies. "I would suspect that we might be seeing a better June result given the calendar shift, weather, Father's Day and promotions designed to move volume ahead of back to school," he said.

But the numbers suggest that while consumers may be willing to loosen up their wallets for certain purchases, they are still holding the line on others. That selective consumer mindset is leading retailers to make conservative calls on their forecasts for this year.

"The consumer is taking a breather and getting a better read on what's happening nationally and globally," said Scott Murphy, executive vice president at Hardesty Capital Management in Baltimore. Between the Gulf oil spill, stock market volatility, the European debt crisis and lingering unemployment, consumers are faced with enough bad news to give them pause, he said. But this does not mean a double-dip is imminent, only that the economic recovery remains tepid, and likely to stay that way, he said.

June sales are expected to be stronger thanks to the combination of Memorial Day, Father's Day and graduation gift shopping. But retailers have been conservative in their outlooks, even after many of them posted better-than-expected sales in the first quarter. They anticipate that year-over-year sales comparisons will become tougher as 2010 goes on, and profits will be more elusive as they are forced to reverse some of the cost-cutting in inventory and staffing that helped them navigate the recession. Businesses are now in a restocking cycle, as The Wall Street Journal recently reported, and that -- combined with rising materials prices -- will put downward pressure on profits as the year goes on.

Two-Month Average Will Be a Better Indicator

Many analysts will likely average the May and June totals together to get a better gauge of consumer sentiment going into the key back-to-school season in July, retail's second-largest sales period after the winter holidays. If the two-month average shows momentum, as the March-April average did, there may be reason for retailers to hope for upside surprises as the year goes on.

But in the short term, retail stocks will likely take a hit Friday while investors digest the sales numbers. Murphy noted the stock market has trimmed at least 10% off retail shares during the last few weeks' stock gyrations, so the retail companies have already been marked down.

But even Murphy, who considers himself a contrarian, is not ready to say shoppers are in retreat.

"The consumer is taking a breather," said Murphy. "The conclusion should not be he's running for the hills."